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Protect yourself if you offer seller financing on a property

| Aug 12, 2020 | Real Estate |

Homeownership has long been a cornerstone of the modern American Dream. People aspire to the independence of having their own property and the freedoms that come with that acquisition.

As someone with a house that you want to sell, especially if the property needs work, offering owner financing can plug you into a massive and underserved market of middle and low-income adults who want homes. Before you commit to anything, you will want to take steps to protect yourself and your investment in the property.

Ask for a reasonable down payment or deposit

Mortgage lenders typically offset some of the risks that they take in financing a home by requiring a large down payment. You only have to think about the value of the property and the potential damage that active destruction and unintentional neglect could cause.

You want to request a deposit or down payment that represents at least a portion of the damage someone could cause to the property. It is common for those financing the sale of their own property to request a specific percentage of the purchase price as a down payment in cases involving a land contract or to request a large security deposit or similar, non-refundable property deposit for a rent-to-own arrangement.

Don’t leave yourself in a position where you have to foreclose

In theory, if the people who try to buy your house experience financial hardship and can no longer make payments on the property, they will alert you to the situation and leave the property. Unfortunately, some people will just try to stay as long as they can without any concern about your lost revenue and the financial impact of a foreclosure.

As the property owner, you could spend hundreds of dollars, if not more, trying to legally remove would-be buyers from your property. Having the buyers execute a deed in lieu of foreclosure at the time that you sign the promissory note or rental agreement will facilitate a faster and cheaper return of ownership in the event that the buyer misses one or more months of their scheduled payments.

 

Depending on what kind of property and your current financial circumstances, there may be other considerations that you have to factor into your agreement. Getting good advice before you set the terms for a seller-financed real estate transaction can help you maximize your protection and minimize your risks.

 

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